Survey examines what buyers are thinking when it comes to sourcing services on a global scale.
What are corporate decision-makers thinking about global services and outsourcing? Are they planning to increase or decrease their spending? Does your organization lead its peers in global sourcing? Or is your enterprise a follower?
Earlier this year, neoIT and Goldman Sachs partnered to develop a market indicator—the Global Services Confidence Index—to provide insight into where spending in globalization and outsourcing was heading. Those insights can help serve as key indicators for your own organization’s global sourcing plans.
n If global sourcing isn’t on the table, ask why not. The survey results reinforced a notion that we’ve held at neoIT since our inception: global sourcing is evolving. Today, nearly every company uses some combination of globalization and outsourcing to deliver internal and even external services.
The evolution in organizations’ attitudes about global sourcing, especially at the C-level, has been dramatic in the past five years. In the past, CIOs and CFOs would ask whether outsourcing should be considered an option at all. Today, if it’s not on the table, the question is why not.
Why the evolution? External firms can realize economies of scale, process discipline, and/or operational efficiency superior to the internal organization—at least in some functions. Early in the evolution of global sourcing, labor arbitrage was the key goal if not the only goal. But more sophisticated buyer/supplier relationships have since developed, allowing enterprises to successfully outsource more complex and/or sensitive processes.
• Increase spending on HRO, which currently lags other business processes. In the first survey, 63 percent of responding organizations plan to increase overall outsourcing of business processes. Respondents plan to increase spending on F&A and procurement outsourcing by 36 percent and spending on logistics outsourcing by 18 percent. Yet in HR, respondents indicated plans to increase HRO spending by only nine percent.
During 2007, interest in globalizing HR services lagged that of other business processes. Many HR organizations hesitate to embrace global sourcing because of statutory requirements. Yet it’s in the best interest of HR executives to at least consider global sourcing as a strategic delivery option.
Even in lean economic times, companies with frozen capital budgets or without discretionary spending can still purchase outsourcing by transferring assets or internal non-discretionary spending to a service provider. Indeed, our survey does reflect plans to continue pursuing global sourcing options, even in the face of tighter budgets. In fact, 29 percent of companies plan to increase global sourcing by more than 10 percent. In contrast, fewer than 10 percent indicated plans to reduce spending on global sourcing.
• Be wary of revisiting contract terms. Of the buyers surveyed, 44 precent indicated that within the next six months they would initiate programs to improve the contracts of existing service providers. Once they’ve considered the risks that re-opening negotiations would introduce, they’ll more likely stick with the current contracts.
When re-opening a contract, all terms and conditions are subject to renegotiation, including current rates, pricing adjustments due to inflation, currency valuation, etc. Given the recent valuation change, in most cases the risk is too high given the benefits in terms or conditions that an organization could realize.
• Consider consolidating service providers. While re-opening contracts may not be wise, consolidating service providers may well be. In most companies, global sourcing has matured. Today, executives see the gains to be had from reducing redundancy in contracts, disparities in pricing, and inconsistencies in quality metrics. By consolidating the governance function to one group within the buyer organization and consolidating sourcing contracts to one or a few service providers, organizations can realize both improved service quality and cost reductions of 15 to 20 percent.
• Get in front of the trends. Global sourcing continues to function as a counter-recessionary solution, providing relief to companies as they face budget reductions and other constraints due to economic uncertainty. Most enterprises plan to spend more money—many planning double-digit increases—on global sourcing. Many also plan to source increasingly complex processes.
If your organization is in front of these trends, you’ll continue to enjoy competitive advantage because of it. If your organization is behind them, it’s time to catch up.